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The Eco is set to replace old colonial currencies in several countries

20 April 2020 Comments (0) Politics

In the aftermath of World War 2, the French franc had been devalued so as to have a set exchange rate with the US dollar. This left France’s currency relatively weak, something that could affect France’s existing colonies in Africa and that could also affect imports to those colonies to France. A decision was taken in December of 1945 to create a new currency, the CFA franc, for 14 countries in western and central Africa. 

There has been disagreement over the benefits, especially in recent decades, of having a currency pegged first to the French franc and more recently to the Euro. In December, 2019, the former colonies agreed a deal with France to rename the CFA franc as the Eco and to remove some of the financial links with France that have existed since the CFA franc’s creation. But what does this mean for the countries involved? Will it give them more economic freedom or will it lead to problems with imports and exports?

The Eco Would Be Pegged To the Euro 

A lot of the impetus for this change comes from the Economic Community of West African States (ECOWAS), a regional grouping of 15 countries established in 1975. For more than 20 years, ECOWAS has sought to establish a common regional currency in order to remove issues caused by trade barriers and to boost economic growth in a region that has over 380 million people living in it. While the 8 countries (most of them French-speaking) in the West African Economic and Monetary Union (WAEMU) bloc reached agreement in December to start moving away from the CFA franc, some issues still remain. The agreement would see the countries no longer having to keep half their reserves in France (something they had to do as France guaranteed the CFA franc). 

However, the new currency would be pegged to the Euro and that pegging would be guaranteed by France, something that is making Anglophone countries in the area such as Nigeria and Ghana reluctant to join, especially as France would have a seat on the ECOWAS board as a result. 

The Covid-19 Crisis Severely Impacts the Original Plan

The original plan was to roll out the new currency sometime in 2020. But there are two hurdles that stand in the way of that ambitious timetable. The first of those is that the criteria set for economic convergence included any countries involved keeping their public debt lower than 70% of GDP and also having inflation in single figures. As of December, only Togo – one of the smallest countries in the region – had met that criteria. The second hurdle is the current Covid-19 crisis which is severely impacting the global economy. With the next ECOWAS meeting schedule for June of this year, it remains to be seen whether it will go ahead as planned. 

Nigeria and Ghana are both looking at the proposals in more detail and Nigeria has stated that they will respond later in 2020. Ghana is enthusiastic about the plan but are insistent that any exchange rate must be flexible and the Governor of the Bank of Ghana has said that issues surrounding the new currency will take time to resolve. 

International Monetary Fund welcomes the proposals

The IMF’s managing director, Kristalina Georgieva, has welcomed the proposals. She sees them as much needed modernisation of the fiscal policies between France and its former colonies. She also recognised that WAEMU has a solid track record in recent years as far as maintaining economic growth and low inflation were concerned and that they had increased their foreign exchange reserve levels. 

Transition and Problems

The possible postponement of the ECOWAS meeting aside, there may still be more issues facing the planned transition period. 

  • The pegging of the ECO to the Euro, and the unconditional guarantees of that from France, have to be ratified both by the French parliament and by WAEMUM members. 
  • The exact terms of the guarantee from the French Treasury have still to be agreed. Will it take the form of overdraft facilities or an extended line of credit? 
  • Withdrawing the African currency reserves held in France can only happen once these two agreements have been signed. 
  • Once those reserves have been withdrawn, the interest on them will be less than the 0.75% the French Treasury currently pays. This will mean that budgets will have to be adjusted. 
  • Dates have to be agreed for when France’s representatives on the La Banque Centrale des États de l’Afrique de l’Ouest’s (BCEAO) supervisory bodies should be withdrawn. 
  • Agreement as to note printing and coin minting for the Eco cannot be reached until the various positions of the regional bodies agree as to fixed or flexible exchange rates and the question of pegging. 

Hopefully, the nations involved can overcome the hurdles facing them. As Africa’s economic growth continues, such plans for regional currencies to support existing trading blocs may be a vital part of progress.

Photos : agoravox.fr / afrique.le360.ma / financialafrik.com

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South Africa’s rand steady, caution prevails ahead of British referendum

22 June 2016 Comments (0) Africa, Business, Latest Updates from Reuters

JOHANNESBURG (Reuters) – South Africa’s rand pulled back from seven week highs against the dollar on Wednesday, with traders and analysts expecting caution to prevail on the eve of a British referendum on whether to remain in the European Union.

Domestic economic headlines have taken a backseat in moving the currency this week, although inflation data due out at 0800 GMT could boost it slightly if higher than expected, raising the prospect of higher interest rates this year.

At 0653 GMT the rand traded at 14.7290 to the dollar, not far off its previous close at 14.7350.

It was however down about 10 cents from Tuesday’s high of 14.6225, the rand’s strongest level since May 4 which came on the back of a rise in risk appetite as investors bet on Britain staying in the EU after Thursday’s vote.

“Optimism in financial markets ahead of the UK referendum has tempered ahead of the vote tomorrow,” Standard Bank said in a note.

Government bonds edged higher in early trade, with the yield for debt due in 2026 dipping 2 basis points to 8.97 percent.

The stock market’s Top-40 futures index was up 0.26 percent, signalling a slightly firmer start for the bourse at 0700 GMT.

 

(Reporting by Stella Mapenzauswa; Editing by Tiisetso Motsoeneng)

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Tunisia’s dinar hits record lows over tourism, economic data

16 June 2016 Comments (0) Africa, Business, Latest Updates from Reuters

TUNIS (Reuters) – Tunisia’s dinar currency has fallen to record lows versus the euro and the U.S. dollar this week as weaker exports, lower investment and a plunge in tourism revenues have eroded the country’s foreign reserves.

The dinar traded at 2.47 against the euro and 2.13 against the dollar on Wednesday and on Thursday was at 2.43 versus the euro and 2.16 against the dollar, according to central bank figures.

The government was expected to announce new measures on Monday aimed at stabilizing the currency. The North African state’s tourism industry has been shattered by two major Islamist militant attacks on foreign visitors last year.

“The record drop in the value of the dinar is caused by lower exports and a lack of investment that have lowered foreign exchange reserves,” central bank director Chedli Ayari told reporters in parliament on Wednesday.

He said the central bank would not interfere to halt the slide in the dinar because “the level of reserves is still average… and reflects the reality of the Tunisian economy.”

Exports fell 2.6 percent during the first five months of the year while foreign direct investment dropped 5 percent to $268 million in the same period compared to a year earlier, according to government statistics.

Tourism, which comprises 8 percent of GDP and is a key source of foreign revenue, has been struggling.

Islamic State gunmen attacked the Tunis Bardo museum and a Sousse beach hotel packed with tourists within a 3-month period last year, prompting many tour operators to suspend visits to the North African country.

Tunisia’s government is currently trying to push through reforms and some austerity measures to curb its deficit, among the measures demanded by international lenders such as the International Monetary Fund and the World Bank.

Government spokesman Khaled Chaouket said officials would next week announce measures meant to arrest the fall of the dinar including commerce ministry initiatives. Some analysts expect these to include restrictions on luxury imports.

The weakened dinar may boost smaller local exporters by making their products cheaper abroad, but could also make debt service payments tighter and widen the deficit if the government does not act, said local financial risk expert Mourad Hattab.

“The dinar has never been at these levels against the dollar and the euro,” he said. “But there is a tendency for the financial authorities not to interfere because it is part of the reforms the IMF is demanding.”

 

(Reporting by Tarek Amara; Writing by Patrick Markey; Editing by Mark Heinrich)

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South African rand on shaky ground after current account gap widens

15 June 2016 Comments (0) Africa, Business, Latest Updates from Reuters

JOHANNESBURG (Reuters) – South Africa’s rand stayed on the back foot against the dollar early on Wednesday a day after central bank data showed a wider-than-expected current account deficit.

By 0711 GMT the rand was at 15.2850 against the greenback, little changed from its New York close at 15.3040 in the previous session.

The local currency had fallen as much as 1.5 percent to its weakest in more than a week on Tuesday after the South African Reserve Bank said the current account deficit widened to 5 percent of GDP in the first quarter of this year 4.6 percent.

Government bonds edged higher, and the yield for the benchmark instrument maturing in 2026 eased 3 basis points to 9.17 percent.

South Africa relies heavily on portfolio flows to plug its current account shortfall, making the rand more vulnerable than its emerging market peers when risk appetite wanes.

“Local data this week has not provided any comfort for the local unit and this, long with markets bracing for a number of significant events, has seen the rand remain firmly under pressure,” Nedbank said in a market commentary.

Traders and analysts said markets were focused mainly on the U.S. Federal Reserve’s policy meeting later on Wednesday while the prospect of Britons voting to leave the European Union at a June 23 referendum had dampened risk appetite.

On the equity market, the JSE exchange’s All-Share index was up 1 percent in early trade, while the benchmark Top-40 index added 0.9 percent.

 

(Reporting by Stella Mapenzauswa; Editing by Andrew Heavens)

 

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